A group of 26 high-profile institutional investors and two major investor groups UK-based Local Authority Pension Fund Forum (LAPFF) and the US Council of Institutional Investors (CII) have written to the US Congress raising concerns about a new bill which aims to tighten regulation of proxy advisory firms.
The proposed legislation, the Corporate Governance Reform and Transparency Act of 2016, seeks to have proxy advisory firms register with the Securities and Exchange Commission (SEC) by disclosing a set of information that includes vote recommendation procedures and policies.
It will also require advisors to provide companies with their recommendations prior to publication and have access to the staff member who prepared them to resolve any inaccuracies.
The bill, also known as the Proxy Advisory Reform Act, has been sponsored by Wisconsin Republican Sean Duffy and John Carney, a Democrat from Delaware.
It has the support of a number of high-profile corporate groups including the National Investor Relations Institute and the Business Roundtable, who last month voiced support for the legislation to the House Committee on Financial Services, currently scrutinising the bill.
But now a group of influential investors have written to Jeb Hensarling, Chairman of the House Committee on Financial Services, and Maxine Waters, a ranking member on the same committee to voice their strong opposition to the bill. The investors say the bill aims to tighten regulation of proxy advisory firms “to the detriment of investors”.They continue that it will “weaken public company corporate governance in the United States; lessen the fiduciary obligation of proxy advisors to investor clients; and reorient any surviving proxy advisors to serve companies rather than investors”. In the letter, co-ordinated by the CII, the investors also address criticisms of the proxy advisory world, including undue influence. They say the view that the two leading proxy advisory firms, ISS and Glass Lewis, dictate proxy voting results “is simply incorrect” and that proxy advisory firm influence is exaggerated by analyses that confuse correlation with causation. The investors also stress that they do not follow proxy advice in lockstep and direct engagement by them with portfolio companies has stepped up substantially in recent years. The investors also warn that the bill risks giving companies too much control over proxy advisory firms through allowing them the right to preview proxy advisory firms reports and lobby the writers to change recommendations. The bill would also require each proxy advisory firm to employ an ombudsman, which the investors say would make firms vulnerable to ill-founded or trivial complaints from issuers. They also raise concerns that the bill would give an “aggrieved” “subject” of a vote recommendation a right to sue the proxy advisory firm.
“We think it highly likely this one-sided right to sue will have a chilling effect, particularly where companies are poorly governed or where there is poor or abusive management that potentially is vulnerable to active and informed shareholders using their votes to call management to account,” they conclude.
Signatories to the letter are:
Hermes Equity Ownership Services
Wespath Investment Management
United Brotherhood of Carpenters
Office of the New York State Comptroller
Florida State Board of Administration
Hermes Investment Management
UAW Retiree Medical Benefits Trust
Fife Council Pension Fund
Legal & General Investment Management
Vermont Office of the State Treasurer
Kapitalforeningen Unipension Invest
UK Local Authority Pension Fund Forum
California State Teachers’ Retirement System
Public Employees’ Retirement Association of Colorado
New York City Comptroller
USS Investment Management
CtW Investment Group
Environment Agency Pension Fund
State of Oregon
Washington State Investment Board
Newton Investment Management
International Brotherhood of Teamsters